Monday, April 1, 2013

Japanese Dominoes

Given the predictions about imminent Japanese economic collapse, (recent estimates from Kyle Bass including a %60 currency devaluation and %70 stock index devaluation), what countries have exposure to restructurings of Japanese international businesses?

The answer may not be which countries, but rather, which municipalities, states and provinces.

Japanese industrial conglomerates are major employers around the world, with Honda, Toyota, Mitsubishi and other factories being key employers in a number of major regional economies. If the Yen were devalued by a third or half against western currencies, the resultant loss of purchasing power will have significant cost increases to them in operating North American plants. This may be mitigated by the likelihood that products made here are also sold here, with reduced exposure to the needs of the Japanese parent company, but a Yen devaluation may create unanticipated change in North American manufacturing.

Were even one of these companies to close its North American operations, it would be devastating to certain local economies. The regional government would likely be under pressure to loan the Japanese firms the cash, if only to keep their constituents employed. A billion here and a billion there may not seem like a lot of money to governments compared to their gross debt, but as a shock to state balance sheets, bail outs for Japanese auto plants is a risk with significant knock-on effects.

We can expect every attempt by regional governments to create a soft landing. Bailouts like those of American auto manufacturers in 2008-9 could conceivably be repeated for Japanese ones. It is less unthinkable when we remember that regional governments claim to have actually made money on bailout loans to American auto makers.

It is not a catastrophic situation. Even financial prophets of doom see a Japanese restructuring as a buying opportunity. Hence, emergency loans to productive companies are a way of getting in at the bottom of the market. The main issue worth raising now is the uncertain timing of the shock.

Yet, most sales of Japanese cars are financed through various financing arms and arrangements. It means that the cash flows paying off all those car payments will still be active, and any new parts from Japan will be paid for using a significantly devalued yen.

Japanese companies have a reputation for resisting unionization of their workforces in North America, and so even if they did lay off workers, the non-unionized work force would have less political leverage than GM did, and they may not be as persuasive of politicians to bail them out.

More information is certainly needed, but it's an angle worth looking at as Japan's downward spiral accelerates.